Metcash (MTS) – Drinking Problem

Metcash operates as a wholesale distribution and marketing company in Australia. It operates through food, liquor, and hardware segments. It sells its products under the IGA, Foodland, Mitre 10, Home Hardware, TotalTools, Cellarbrations, IGA Liquor, and the Bottle-O brand names. Metcash was founded in 1927 and is based in Macquarie Park, Australia.‍

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Metcash posted first-half FY26 earnings short of market expectations, driven partly by the earlier recognition of restructuring costs than consensus had forecast. The key food business met forecasts, but the hardware and liquor divisions fell short of expectations. In the first four weeks of the second half, the grocery wholesaler and hardware chain Metcash reported group sales growth of 2.9%, a run rate ahead of our second half forecast of 1.4%, but the composition was patchy – food sales excluding tobacco rose 4.3%, versus our forecast for 3.8%, but liquor, up 0.1% versus our estimate of 2.5%, and hardware, up 3.8% versus our expectation of 8.1%, missed our numbers by a long way.

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The food division excluding reconstruction costs and Superior Foods, the commercial food services division, increased earnings before interest and tax by 1.4%. In Ord Minnett’s view, this was a creditable performance given sales of tobacco dived 35% on a year ago, the same sort of slide we have seen across the other tobacco retailers. As with Endeavour Group (EDV) and Coles (COL), the liquor market continues to be a struggle, as the industry faces headwinds from changing consumer attitudes to health and cost of living pressures. Liquor EBIT fell 8.4% excluding reconstruction costs, and we highlight the risk of greater promotional intensity from rivals as suppliers battle for market share.

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Hardware EBIT for the first half fell 4%, the fifth-straight half-year fall. That said, Metcash highlighted that the division lifted earnings in the second quarter, i.e. the three months to October as the company balances its books in April, which provides us with some confidence the bottom may have been reached. We note, however, any uptick in the housing market that would materially lift hardware earnings is unlikely to be as strong as previously anticipated given the broader inflation and interest rate environment, and we have downgraded our divisional EBIT forecasts accordingly.

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Post the result, we have cut our EPS estimates by 8.0%, 9.2% and 8.3% for FY26, FY27 and FY28, respectively, primarily due to the challenges facing the liquor and hardware operations. This leads us to cut our target price on Metcash to $4.00 from $4.60, but we maintain our Buy recommendation on valuation grounds.